9M18 core PATAMI of RM324.2m (>100%) came in above both our/consensus expectations at 90% each of full-year estimates due to higher-than-expected sales. Correspondingly, we upgrade our FY18E/FY19E CNP by 3%/5%. As such, we increased our TP to RM5.80 (from RM5.50). Reiterate OP. On another note, UMW will be selling 2 parcels of industrial land in Shah Alam for RM287.7m cash, with estimated net gains of RM171.4m (RM0.15/share), expected to be completed by 2Q19.

9M18 above expectations. 9M18 core PATAMI of RM324.2m (>100%) came in above both our/consensus expectations at 90% each of fullyear estimates due to higher-than-expected sales. No dividend was declared for the quarter, as expected.

YoY, 9M18 recorded core PATAMI of RM324.2m compared to core losses of RM218.9m in 9M17 buoyed by: (i) higher revenue across the board with Auto segment (+5%) as UMW Toyota Motor unit sales hit 53,079 units (+11% YoY), while supported by the Equipment segment (+8%), with the strong export sales for Komatsu equipment and industrials old fleet renewal, as well as, the M&E segment (+26%), with higher sales of auto component and improved sales from aerospace business, (ii) the better performance of associate and joint-venture company (+49%) especially from 38%-owned Perodua, which recorded higher unit sales at 168,203 units (+11% YoY), and (iii) improved margin from the stronger MYR against USD

QoQ. 3Q18 core PATAMI surged 18%, mainly from the stronger sales (+13%) across the board with Auto segment (+11%) as Toyota volume rose to 21,370 units (+12%) buoyed by the zero-rated tax holiday, Equipment segment (+10%) with the komatsu fleet renewal and M&E segment (+42%) on the improved contribution from aerospace business. On the other hand, the performance of associate and joint- venture company (+5%), was slower than usual, especially from 38%- owned Perodua, which recorded lower unit sales at 51,105 units (-17% QoQ) due to supply disruption in August and September 2018 for its all- new Perodua MyVi, which has been rectified in October 2018.

Outlook. UMW recently launched the all-new Toyota Rush CKD, and all- new Toyota Camry. UMW will be launching the replacement model for all- new Toyota Vios and one new model, which is not under its fleet now at their new plant (to start production in 1H19), which we foresee is the emergence of 2019 Toyota Yaris Hatchback. On the other hand, Perodua’s entry level segment (2018 sales target at 209k) continued to gain traction supported by the all-new Perodua MyVi (120k booking, 75k delivered) and it is expected to launch the all-new Perodua SUV D38L in 1Q19. UMW Aerospace, under the M&E segment, is expected to trim its losses to c.RM20m level in FY18/FY19 before reaching breakeven level in FY20 considering that some front-loaded investments need to be amortised.

Upgrade FY18E/FY19E CNP by 3%/5% to reflect the higher-than- expected sales.

Reiterate OUTPERFORM with a higher TP of RM5.80 (from RM5.50) based on unchanged 17x FY19E EPS, which is the 5-year historical mean PER.

We like UMW for: (i) expected strong sales growth from capacity expansion up to 125k units (+150%) with improved cost-efficient automation, (ii) strong Perodua associates’ earnings supported by back-logged booking of the all-new Perodua Myvi, and (iii) turnaround in earnings for its M&E segments.

Risks to our call include: (i) lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 03 Dec 2018